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Lower prices or higher quality? Firms’ response to increased competition following trade liberalization

Author

Listed:
  • Maria Bas

    (University of Paris 1 and CES)

  • Vanessa Strauss-Kahn

    (ESCP Business School)

Abstract

This paper investigates the impact of increased competition at the product-market level on firms’ strategic price decisions. We analyse this issue in a context of trade liberalization where only some firms benefit from the input tariff cuts. We focus on China which is characterized by a unique dual trade regime, where some imports of intermediate goods are subject to tariff (i.e., the ordinary status) whereas other (i.e., the processing status) have been exempted of tariffs for the last 30 years. The recent Chinese trade liberalization allowed ordinary importers to improve their competitiveness relative to processing firms. Facing stronger pressures in their export markets, processing firms must adjust their strategy. We find that ordinary firms took advantage of the Chinese’ input trade liberalization to improve the quality of their exported products and processing firms respond to this quality sorting by decreasing their export prices and markups. This finding is more pronounced for lower-end product sold in in advanced economies, where the quality sorting of competitors is more relevant.

Suggested Citation

  • Maria Bas & Vanessa Strauss-Kahn, 2024. "Lower prices or higher quality? Firms’ response to increased competition following trade liberalization," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(2), pages 279-309, May.
    • Handle: RePEc:spr:weltar:v:160:y:2024:i:2:d:10.1007_s10290-023-00503-7
    DOI: 10.1007/s10290-023-00503-7
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    More about this item

    Keywords

    Trade liberalization; Competition; Export prices; Imported inputs; Firm-level data;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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